economic parameters of deforestation - world bank...deforestation rates can increase or decrease...

THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 1: 133-53

Economic Parameters of Deforestation

Joachim von Amsberg

In theory, economic instruments should overcome the market failures that lead toexcessive deforestation. Secure property rights could h$ established and enforced toeliminate the open access problem. In practice, the size of the welfare loss that arisesfrom market failures in the forest sector in the absence of such first-best policies isdetermined by the incentives, prices, and policies faced by those who make decisionsabout land use. In many cases, the effects of policies on deforestation are not straight-forward. For example, there are conflicting views on whether an increase in the priceof logs leads to an increase or a decrease in deforestation. The effect of a change in theprice of logs has particular relevance for the controversial debate about the effect ondeforestation of a ban on log exports or other trade restrictions that lower the domes-tic price of logs.

This article provides an analytical framework for determining the effects of changesin economic policies and parameters on deforestation. It models dynamic, profit-maximizing land-use choices and obtains unambiguous comparative static results bydistinguishing between unmanaged and managed forests. The results suggest that mea-sures to reduce the producer price of logs could be a second-best policy to reduce thepressures on the frontiers of unmanaged forests and to protect biodiversity.

Property rights to forests in frontier areas are rarely established or enforced. Asa result of open access, deforestation (the conversion of forested lands to otheruses) can be excessive. Even when property rights are established, forested landsprovide external benefits that do not accrue to the owner, government forester,or other decisionmaker. These external benefits include stabilization of the re-gional and global climate, conservation of the soil, prevention of floods, preser-vation of biodiversity, and gathering of nontimber products by individuals whodo not own the forest. These externalities can be another reason for excessivedeforestation.

In theory, economic instruments would overcome the market failures thatlead to excessive deforestation. Secure property rights could be established andenforced to eliminate the open access problem. External benefits of forests couldbe internalized by taxes on deforestation or subsidies for the maintenance offorestlands equal in amount to the external benefits. Such first-best policies would

Joachim von Amsberg is with the Brazil Country Management Unit, Latin America and the CaribbeanRegion, at the World Bank. The author would like to thank Ken Chomitz, Jeffrey Hammer, MuthukumaraMani, David Wheeler, and two anonymous referees for their helpful comments. This article is asummarized version of the World Bank Policy Research Working Paper 1350, "Economic Parameters ofDeforestation."

O 1998 The International Bank for Reconstruction and Development/THE WORLD BANK

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134 THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 1

lead individuals to make efficient land-use decisions through the operation ofmarket forces. In practice, however, governments rarely use first-best policessuch as Pigouvian taxes. Some externalities are international in nature (carbonsequestration and biodiversity conservation), and individual countries have noincentive to implement globally efficient policies. Other reasons for the absenceof efficient policies are political (for example, the owners of forests have betterrepresentation than the beneficiaries of positive forest externalities). In addition,the establishment and enforcement of secure property rights are costly.

In the absence of first-best policies, the size of the welfare loss that arises frommarket failures in the forest sector is determined by the incentives, prices, andpolicies faced by those who make decisions about land use. Economic param-eters, such as transportation costs, royalty structure, trade policy, foreign ex-change policy, and productivity changes in the forest sector as well as in agricul-ture, influence the patterns of deforestation through their effects on the incentivesof those individuals making choices about land use. Therefore, two questions arisein the absence of first-best policies for forest management and land use. First,which policies should be avoided because they would increase the welfare lossarising from excessive deforestation? Second, which second-best policies can beimplemented to reduce the welfare loss arising from excessive deforestation?

In many cases, the effects of policies on deforestation are not straightforward.For example, there are conflicting views on whether an increase in log pricesleads to an increase or a decrease in deforestation. In one view, lower log pricesreduce logging profits and the incentives for logging and hence reduce deforesta-tion. In the opposing view, lower log prices reduce the profitability of forestryand hence encourage the conversion of forestlands to other uses such as agricul-ture (see Vincent 1990; Brandon and Ramankutty 1993; and Sharma and others1994). The effect of changes in log prices has particular relevance for the contro-versial debate about the effect on deforestation of a ban on log exports or othertrade restrictions that lower the domestic price of logs.

This article is related to three strands of the theoretical literature. First, anextensive forestry literature builds on Faustmann (1968, originally published in1849) and examines the effects of changes in various economic parameters onthe optimal management of a forest (see Jackson 1980; Chang 1983; Nautiyaland Williams 1990; Hyde and Newman 1991; Thiele 1995; and Thiele andWiebelt 1994). Most of these papers use comparative statics analysis to deter-mine the effect of changes in production costs, discount rate, and various taxeson the optimal rotation age and the optimal management intensity for a givenforest. These models rarely consider possible changes in land use. Second, staticland-use models have been used to analyze the optimal use of land at a givenpoint in time. This work was pioneered by von Thiinen (1826), applied to for-estry by Ledyard and Moses (1974), and recently used by Chomitz and Gray(1996). Third, the effect on land use of changes in the price of logs has beenexplored in recent work that applies land-use models to deforestation problems(Deacon 1994; Deininger and Minten 1996; Southgate 1990; Kishor and

von Amsberg 135

Constantino 1993; Hyde, Amacher, and Magrath 1993; and Barbier and Rauscher1993). In addition, several authors have analyzed the empirical relationship be-tween economic parameters and deforestation (see Barbier and others 1995 andCropper and Griffiths 1994). None of these works, however, has produced un-ambiguous results with regard to the directional impact on deforestation of ap-parently simple changes, such as a drop in the price of logs.

This article provides an analytical framework for determining the effects ofchanges in economic policies and parameters on deforestation. The frameworkallows the systematic analysis and reconciliation of opposing views on the effecton deforestation of changes in the price of logs. A simple theoretical land-usemodel also provides results on the effects on deforestation of specific policychanges, such as the imposition of a ban on log exports.

Section I outlines the modeling approach. Section II presents a formal model ofthe comparative statics of land use. Section HI discusses tentative policy implications.Section IV concludes with a discussion of extensions and further research.

I. MODELING APPROACH

This article analyzes the links between economic parameters and deforesta-tion through a theoretical model of profit-maximizing choice of land use. Fol-lowing von Thiinen's (1826) approach, it assumes that land is put to the use thatmaximizes the present value of profits to the decisionmaker. The analysis ofland-use dynamics is based on a formal comparative statics model, similar tothose in the traditional forestry literature. It differs from previous work by si-multaneously incorporating two elements that are critical for understandingdeforestation processes: a distinction between different types of forests and thedynamic nature of land-use decisions involving forests.

First, the analysis clearly distinguishes between managed and unmanaged for-ests. In unmanaged forests, net timber growth is zero because decaying timberoffsets biological growth. Logging of such a mature forest can be modeled likethe mining of a nonrenewable resource (see Lyon 1981). Unmanaged forestswould include primary forests and mature second-growth forests. Managed for-ests, such as plantation forests, by contrast, are planted in order to be harvestedat regular intervals. Even though the dichotomy of managed and unmanagedforests is somewhat extreme, the distinction not only simplifies the analysis butalso clarifies the often opposite impact of a policy on managed and unmanagedforests. Moreover, the distinction is relevant from a policy perspective becauseunmanaged and managed forests provide different types of environmental exter-nalities. Unmanaged forests typically have higher value for the conservation ofbiodiversity, while managed forests (depending on the subsequent use of forestproducts) can provide greater benefit in terms of carbon sequestration.

The second difference from previous work is the analysis of land-use changesin a dynamic context. A static analysis based on a comparison of returns todifferent land uses at one point in time can be misleading. The relevant question

136 THE WORLD BANK ECONOMIC REVIEW, VOL 12, NO. 1

is not only whether deforestation would occur on a given piece of land but alsowhen it would occur. For example, the introduction of forest plantations couldincrease logging of unmanaged forests in the short run but slow down deforesta-tion in the long run when the plantation output reaches the market. The timingof excessive deforestation is important from a policy point of view because itdetermines the effectiveness of corrective policies that are taken at a specificpoint in time. Therefore, the analysis of policy impacts has to be based on thecomparison between different land-use patterns through time.

In a dynamic context, land-use decisions depend on not only current log pricesbut also the expectation about future prices. The analysis assumes certainty andrational expectations. Therefore, agents determine their profit-maximizing be-havior in the first period for all times in the future based on the expected path oflog prices. In the absence of unanticipated shocks, there is no difference betweenthe expected and realized price path and the expected and realized behavior.

As a result of geographic conditions and anticipated changes in log prices,deforestation rates can increase or decrease over time without a change in policy.Because deforestation rates can change without policy changes, the relevant ques-tion for analyzing the effect of policy changes is not whether deforestation ratesfall or rise after a change in policy occurs, but whether deforestation rates differfrom what they would have been if the change in policy had not occurred. Thiscomparison of the actual with the counterfactual scenario is the natural realm oftheoretical modeling. The analysis models a policy change as an unanticipatedshock that changes price expectations and, therefore, profit-maximizing behav-ior. The analysis focuses on the change in behavior that results from such unan-ticipated policy changes.

II. A FORMAL MODEL OF DYNAMIC LAND USE

This section contains a partial equilibrium model of profit-maximizing landuse to determine dynamic land use as a function of an exogenous path of logprices over time. The model analyzes the timing of land-use changes for eachspecific parcel of land. It derives results for spatial land-use changes by combin-ing the changes in the timing of land-use changes for each class of land (landwith the same locational characteristics).

Initially, all land is covered with unmanaged forest. There is no profit to theowner of an unmanaged forest until it is converted. After converting theunmanaged forest, the owner puts the land to its profit-maximizing use, eitheras managed forest or as farm land. The decision to convert an unmanaged forestdepends on the profit or loss at the time of conversion (value of logs—if sold—minus clearing or logging costs) and the profits from alternative land use afterlogging (farming or managed forest). In this model, the value of logs representsall forest products, including latex, fruits, nuts, and fuelwood. The model isequally applicable in cases where (a) the unmanaged forest is logged, the logs aresold, and the land is subsequently cultivated, (b) the unmanaged forest is logged,

von Amsberg 137

but the land is left idle after logging, or (c) the removal of logs is not profitable,and the forest is simply cleared for subsequent farming or managed forestry.

After the initial conversion of the unmanaged forest, the owner may switchbetween different alternative land uses. Of course, on some lands logging mightnot occur in finite time. The following diagram shows the sequence of possibleland uses:

Managed forest

Unmanaged forest f ^ ^ I

Farming

where f is the time of converting unmanaged forest to managed forest or farm-ing, and f is the time of switching from managed forest to farming or fromfarming to managed forest.

Equation 1 defines the present value of profit from profit-maximizing landuse, IT", in land class / from the time of conversion of unmanaged forest toinfinity. Superscript a refers to the profit-maximizing land use—either managedforest or farming—after logging the unmanaged forest. The land class is for aparticular parcel of land and represents a generalization of von Thiinen-typedistance from market, including other location-specific factors such as slope andfertility.

(1) Uia(r,k)=]e-"nia(s,k)dst"

where k is a parameter that represents the effect of exogenous policy changes onthe log price, n is profit in each period, and s is the time passed after conversionof the unmanaged forest at f. Superscript u refers to unmanaged forest, and r isthe discount rate of the decisionmaker.

Equation 2 defines the land expectation value, LEV, the present value of thesum of conversion profit and subsequent land-use profits.

The model is based on an exogenous log price path. The model, thus, appliesto a situation of perfectly elastic demand, that is, for log exports of a smallcountry. For the log price path, the analysis assumes that p, > 0 and that (pttl pt)< r. (Here and throughout subscripts denote partial derivatives.) This assump-tion appears eminently reasonable given that (ptt I pt) < r is satisfied for anyconstant rate of price increase less than the discount rate, r. The assumption isalso consistent with empirical observation and with the results from theoreticalmodels of nonrenewable resource extraction (logs from unmanaged forests) with


increasing extraction costs and a renewable back-stop technology (logs frommanaged forests) that would make log prices rise at a declining rate. Marketsimulations support the price path assumptions (see section IV).

The effect of policy interventions that would depress log prices is expressed inthe form of a parameter k that enters the log price with the following character-istics: pk<0 and (p^ I pii) < r. An increase in k either reduces the level of the logprice path or reduces the price at any time in some other form; however, anincrease in k does not reduce the slope of the price path more than permitted by{ptklpk) < r- With profit functions increasing in log prices, the profit from bothconversion and subsequent cultivation will decline with a drop in log prices,resulting in the following properties: n^ < 0, II jf < 0.

The Remaining Untnanaged Forests

How do changes in the log price path affect the area of unmanaged foreststhat will ultimately remain? The unmanaged forest will never be converted inany class of land in which the LEV is less than zero for any finite time of conver-sion. By contrast, all land will ultimately be converted in classes of land in whichthe LEV is greater than zero at least at some time. With these properties, LEVdecreases, for all f, with a drop in the log price path, k. With a lower log pricepath, there is no land class in which unmanaged forest that is ultimately con-verted would not also have been converted with higher prices. However, someclasses of land that would ultimately be converted under a higher log price pathmay not be converted at all under lower prices. Hence, the unmanaged forestarea that will ultimately be converted is equal or less under a lower log pricepath.

Up to this point, the model is general enough for the results to hold indepen-dent of the property rights regime and the specific production functions dis-cussed in the following sections. It also applies for a Faustman-type rotationmodel for managed forests in which forest intensity and rotation period arechosen to maximize the LEV.

Conversion of Unmanaged Forests with Secure Property Rights

The next step is to analyze how economic parameters affect land use duringthe time of transition from all-unmanaged forest to the final land use. To pro-vide stylized answers to this question, this section assumes very simple produc-tion functions. The analysis is carried out first for the case of secure propertyrights and then for the case of open access.

Under secure property rights, conversion profits and profits from subsequentcultivation accrue to the owner or decisionmaker. Even under secure propertyrights, externalities occur in the form of nontimber benefits of the forests that donot accrue to the landowner, such as climatic and soil stabilization, biodiversityconservation, and nontimber forest products. The case of secure property rightsis also applicable where logging decisions are made by a government that caresabout logging revenues but ignores nontimber benefits of the forest. Such gov-

von Amsberg 139

ernment behavior appears reasonable for a variety of reasons. In contrast tonontimber benefits, logging often generates government revenues from stump-age fees. Some nontimber benefits such as climate and soil stabilization willaccrue in the future, possibly after the tenure of the current government. A con-centrated logging industry can generate lobbying pressure on the governmentmore easily than the less-organized recipients of nontimber benefits can. Finally,some nontimber benefits may accrue as international externalities.

Under secure property rights, the owner of each piece of unmanaged forest-land maximizes the LEV by choosing the optimal time for converting theunmanaged forest, the optimal subsequent land use, and possibly the optimaltime for switching later from managed forest to farming or from farming tomanaged forest. For simplicity, the analysis uses Leontief (constant coefficient)technology for the production of logs. In real-life forestry, there is clearly somesubstitutability between timber land and effort. Different logging intensities andtechnologies can be observed in logging operations throughout the world. De-tailed analysis shows that the main result of this section—conversion ofunmanaged forests proceeds less rapidly with lower log prices—continues tohold under very reasonable conditions even with variable logging effort (vonAmsberg 1994).

The two inputs to production are unmanaged forestland and logging effort(with effort representing all inputs other than land, for example labor andcapital such as chainsaws). The profit from converting unmanaged forest isif"(t, k) = lmp(t, k) - c"*, where /*" is the quantity of logs that can be sold once atthe time of converting (logging) one unit of land of unmanaged forests in landclass i, and d" is the cost of converting one unit of land of unmanaged forest inland class i and transporting logs to the market.

For simplicity it is assumed that a managed forest produces a constant timbercrop. The model abstracts from the question of optimal effort and optimal rota-tion periods in the managed forest and focuses squarely on the question of landconversion. The profit from a managed forest is i&"(t, k) = e~rdtmp{t, k) - c™, where/"* is the quantity of logs that can be produced each period by cultivating one unitof land in land class i with managed forest, d™ is the cost each period of cultivatingone unit of land in land class /" with managed forest and transporting logs to themarket, and d is the fixed rotation period until the harvest of a managed forest.

Land that is left idle after logging yields zero profits. Profits from farming areassumed to be independent of p, c", cm, and r. The profits from profit-maximizing land use after converting unmanaged forest are assumed to benondeclining.1 With these assumptions, the following properties result: 7t̂ > 0,

1. The assumption about nondeclining profits refers to the time of logging, t", and not to the timepassed since land conversion, s. For simplicity, the model does not allow for profits to depend on s. Eventhough not shown formally, the basic intuition of this model would not change if profits were decliningin t as long as the present value of future alternative land uses at the time of conversion would benondeclining in f. With this extension, the basic results would carry through also in the cases of shiftingor nutrient-mining agriculture where agricultural profits would typically decline in s (but not in t").

140 THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO.

0, Jt" < 0, (n-,/7^) < r, T?U = 0, (nft / nj) < r, 7t?> 0,7iT< 0, *?< 0,7t7< 0, and0. (To simplify notation, superscript / is omitted from expressions that hold

for all i.)Land use after the logging of unmanaged forest is determined by maximiz-

ing profits by choice of land use over time (managed forest or farming). Theoptimal time of logging the unmanaged forest is determined by maximizingthe present value of returns from logging and subsequent profit-maximizingcultivation (s is the integration variable, running from the time of logging, f,to infinity):

(3) maxLEV = ertmnu(t",k)+ [e~"n'(syk)dsr J

r

subject to the condition that max LEV > 0 because logging would not take placewithin finite time if max LEV < 0. The first-order condition is:

(4) LEV. =dt"

where an asterisk denotes the LE V-maximizing conversion time. The intuitionof this first-order condition is that at the optimal time of conversion, the rate ofappreciation of logs in the unmanaged forest, due to the increasing log price,must equal the forgone returns from logging as well as alternative cultivation ofthe land.

The effect of changes in the parameters on the optimal time of conversion, ***,is determined by solving the total derivatives of equation 4 with respect to k, cf,and r for (df"' / dk), (df' I dc"), and (df' I dr), respectively:

dt" LEV^ _ r7t% + Jig — 71^ „AU ~ _J p V ~ ^x __« _a

(5) w L £ V " - " - - "

nU+n"r—>0if»i"+it">0.dr -LEVtt nu

tt~r%ut-n

at

Hence, on any piece of land, a reduction in the log price path (an increase ink) delays the profit-maximizing logging time. An increase in the cost of loggingalso delays logging. If profits from logging are positive and greater than thereduction in profits from land cultivation with an increase in the discount rate,then an increase in the discount rate advances deforestation.

von Amsberg 141

Conversion of Unmanaged Forests with Open Access

Unmanaged forests typically involve frontier situations with poorly definedproperty rights and some form of open access. Angelsen (1996), Schneider (1995),Mendelsohn (1994), Mahar (1989), Anderson and Hill (1990), and Binswanger(1989) have modeled such situations of frontier land use and land races. In thesemodels, property rights are granted only for colonists who invest resources (whichtypically means that they clear the land). Such a policy regime has been analyzedin the case of Brazil but is common in other countries as well. Mendelsohn (1994)shows that development (or conversion of unmanaged forest) will occur wher-ever the value of land is positive; however the rents of land with values abovezero will be at least partially dissipated through the investments necessary toestablish property rights. The following modification to the basic model ana-lyzes how changes in log prices affect unmanaged forest conversion under thisparticular policy regime.

If access to the unmanaged forest is open and property rights are acquired byclearing and cultivating land, conversion does not take place at the profit-maximizing time but as soon as the sum of profit or loss from conversion andthe present value of profits from subsequent cultivation rises to zero. All landswith positive conversion profits would already have been converted in the past.The condition that determines the time of conversion is thus:

(6) LEV = nu(f\k)

The comparative statics results can be formally derived, similar to the case ofsecure property rights. For the open access case, the algebra is tedious, but theresults are rather obvious. Therefore, the formal derivation of the followingcomparative statics result is not shown here:

Under open access, a drop in the log price path delays the logging time, as inthe case of secure property rights. This is intuitively obvious by observing thatLEV in equation 6 is increasing in f and decreasing in k (it? > 0 and 7rf S 0 byassumption, and 7rJ < 0 and JT| ^ 0 because profit functions are increasing inoutput price). Therefore, any increase in k has to be offset by an increase in t", orvice versa, in order for equation 6 to hold.

The Switch between Managed Forests and Agriculture

After unmanaged forest has been converted, the land will be put to the profit-maximizing use, which may be farming or managed forest. If there is a change inthe relative profitability of these activities, there may be a later switch from one


to the other. If there is a switch, the optimal time of the switch from managedforest to agriculture [t°'), or from agriculture to managed forest, is determinedby the condition of equal profits in both land uses:

(8) 7t (t ) = K (t , k)

where superscript f refers to farming.Solving the total derivative of equation 8 with respect to k, <f, and r for

(df'/dk), (df'/dcf), and (dtf'ldr), respectively, gives the comparative statics ef-fects. If profits from managed forests are expected to rise faster than profitsfrom agriculture (71J" > Ji{), then f' marks the time of optimal conversion fromagriculture to managed forestry. With the assumptions on profit functions madeabove:

dt"' n?dk

df'

dcm

df

nft - <

_ *rn{ - n?

<

(9)d c m n't - nt

m

At"" TTm

dr n[ - 7if

If, however, 7C71 < 7i( (in this case, f* marks the time of optimal conversion frommanaged forestry to agriculture), then all signs are reversed: (df'ldk) < 0,(dfVdc"1) < 0, and (df'/dr) < 0. These results simply show that the switch fromfarming to managed forests, if it occurs, is delayed by factors that reduce theprofits from managed forests (a drop in the log price path, an increase in the costof managed forests, or an increase in the discount rate). A switch from managedforests to farming, if it occurs, is advanced by the same factors.

Land-Use Changes

The analysis has produced unambiguous results on the timing of land conver-sion for any land class i. Because this analysis is valid for any land class, itimplies results for aggregate land-use changes over time. A drop in the log pricepath delays the possible conversion of unmanaged forest to other uses (includingmanaged forests), delays the possible switch from fanning to managed forest,and advances the possible switch from managed forest to farming, all for anyland class /'. Therefore, at any time after the drop in the log price path, there willbe more or equal land under unmanaged forests and less or equal land undermanaged forest than if the price drop had not occurred. The effect on the aggre-gate area of agriculture is ambiguous.

A drop in the log price path reduces the conversion of unmanaged forestsand, thus, retains a larger area of unmanaged forests. At the same time, how-ever, a lower log price path reduces the area under managed forests. Keeping in

von Amsberg 143

mind the distinction between unmanaged and managed forests, the intuition ofthe main result is easily explained. The conflicting views about the effects of logprice changes on deforestation arise from the dual nature of forestland as stor-age for logs and as an input to the production of logs. This article reconciles thetwo opposing views by analyzing the distinct impacts of changes in the price oflogs on different types of forests, which are characterized by the difference in theimportance of land as storage for logs or as an input to log production. A higherlog price path increases the logging of unmanaged forests that are used to storelogs but that are no longer productive. With a higher log price path, the loggingof more remote, unmanaged forests with higher site-specific extraction costsbecomes profitable, and the logging of unmanaged forests increases. By con-trast, managed forestlands are productive. A higher log price path increases theprofitability of log production and results in more land being devoted to logproduction. Therefore a higher log price path leads to a smaller area of unmanagedforest and a larger area of managed forest.

Figures 1 and 2 illustrate the translation of results for the timing of conver-sion of a specific land class to results for aggregate land use over time. The land-use graph in figure 1 shows different land classes on the vertical axis, with higherland classes representing increasingly unfavorable conditions for cultivation, forexample increasing transport costs in a von Thiinen-type model. The horizontalaxis represents time beginning with a situation in which all land is covered withunmanaged forest. In good locations (near the horizontal axis), agriculture isrelatively more profitable than forestry. Conversion of unmanaged forest wouldbegin at these most favorable locations and, as the price rises along the log pricepath, proceed to less favorable locations. At sufficiently high log prices, man-aged forestry becomes profitable as shown in the example in figure 1. Once thelog price stabilizes, no further conversion of unmanaged forests occurs.

Figure 2 illustrates the effect of a drop in the log price path (an increase in k).For each land class, the conversion of unmanaged forests—if it occurs—is de-layed (compared with the dark line that represents the base case), the switchfrom agriculture to managed forests—if it occurs—is delayed, and the switchfrom managed forestry to agriculture—if it occurs—is advanced. As a result ofthese changes in the timing of conversion of specific land classes, there are changesin aggregate land use at any specific time. An unanticipated drop in the log pricepath leads to an increase in the area under unmanaged forests and a reduction inthe area under managed forest at any time after the shock.

Table 1 summarizes the results of the analysis. It compares aggregate land useat any time after a hypothetical shock with a situation in which the shock wouldnot have occurred. Additional results, not all analytically derived here, includethe following (see von Amsberg 1994).

• An increase in conversion (logging) costs for unmanaged forests (or a loggingfee per unit of unmanaged forest) produces an increase in unmanaged forestsand a decrease in managed forests and farming area.


Figure 1. Log Price and Land Use in the Base Case

Log price pathPrice

• •

- v-

1 1

• • • ) ' ' ' • «

• ] • .

1 1 1

•

A, . ' •

; . . . , .

• " . . : •

i [

— — -

1

, 1

« ^ —

<

- • • • . ' •

— —

• • - • :

i i

' . . " ' : .

; • • •'<, L '

. • - . . . . - • • .

;^ L

't " . i ' '

• , / : 1 J

i i i i

• . > • • . •

: • .

-

i i

Land class

Time

Land use

Time

Agriculture ^ Managed forest | Unmanaged forest

von Amsberg 14S

Figure 2. Log Prices and Land Use in the Log-Price Drop Case

-r-. Log price path . _Price

Land class

Time

Base case Log-price drop case

Land use

i i i i i i i I i i I I I i i I

Time

LJ Agriculture ^ Managed forest H Linmanaged forest

Note. Black lines depict the base case land use for comparison. • .

'Wf.


• An increase in the decisionmakers' discount rate produces a reduction inunmanaged forest if logging is relatively profitable (see equation 5) and anincrease in the area of unmanaged forest otherwise.

• An increase in farming profits produces a reduction in the area of bothunmanaged and managed forests and an increase in the area of farming.

• A reforestation subsidy per unit of land produces a reduction in the areasof unmanaged forests and farming and an increase in the area of managedforests.

in. POLICY IMPLICATIONS

In a very simple land-use model, a drop in the log price path leads to a delayin the conversion of unmanaged forests in all land classes. The quantity ofunmanaged forests that is ultimately preserved is the same or larger under alower log price path. The area of managed forests is reduced under a lower logprice path. Great care needs to be taken in applying the results of a simple theo-retical model directly to complex real-life policy situations. However, the mainresult of the basic model and its underlying basic intuition appear to be robustenough to suggest some implications for the policy debate on timber trade re-strictions, agricultural intensification, and changes in the cost of capital.

Table 1. Policy Interventions and Changes in Land Area Usedfor Unmanaged Forest, Managed Forest, and FarmingPolicy intervention

Drop in log pricecaused by log unittax or log exportban

Increase in conver-sion costs (loggingtax per land unit)

Increase in thediscount rate

Increase in fanningprofitability

Reforestation sub-sidy (per area unit)

Unmanaged forest

Increase

Increase

Decrease if loggingunmanaged forestis relativelyprofitable;increase otherwise

Decrease

Decrease

Managed forest

Decrease

Decrease at theunmanaged forestmargin; no effectat the agriculturemargin

Uncertain effect iflogging unman-aged forest isrelatively profit-able; decreaseotherwise

Decrease

Increase

Farming

Decrease at the unman-aged forest margin;increase at themanaged forestmargin

Decrease at theunmanaged forestmargin; no effect atthe managed forestmargin

Increase if loggingunmanaged forest isrelatively profitable;uncertain otherwise

Increase

Decrease

von Amsberg 147

Timber Trade Restrictions

Many timber-exporting countries have imposed log export bans (LEBs) or highlog export taxes (see Crossley 1993). LEBS were imposed primarily with the ob-jective of promoting domestic processing and the export of higher-valuedsawnwood or manufactured goods. Even though LEBs were conceived as instru-ments for the protection of infant industry, they have implications for loggingrates, and a lively debate centers on the environmental effects of LEBS (seeGoodland and Daly 1994). LEBS, most other timber trade restrictions, as well asconsumer boycotts in importing countries lower the price of logs in the export-ing country. Following a log export ban in Costa Rica, for example, domesticlog prices have fallen to 20-60 percent of international price levels (Kishor andConstantino 1993).

This article suggests a differentiated approach to analyzing whether lower logprices increase or decrease deforestation. A lower log price path would tend toreduce the logging of unmanaged forests but, at the same time, would also tendto reduce the area of managed forests. At any time, there would be moreunmanaged forest and less managed forest than otherwise.2 This result is consis-tent with earlier findings that lower domestic log prices encourage wasteful log-ging and processing techniques (Repetto and Gillis 1988). In contrast to Repettoand Gillis (1988), however, this article suggests that the reduced logging inten-sity resulting from a lower log price path would go along with reduced logging(and larger remaining areas) of unmanaged forests and reduced areas of man-aged forests.

Policies other than LEBs that reduce log prices include import restrictions bylog-importing countries and consumer boycotts of tropical timber. Such policieswould tend to reduce the pressure for logging unmanaged forests and thereforeassist the conservation of biodiversity and other external benefits associated withunmanaged forests. The same measures would lead to reduced incentives formanaged forestry and a decline in the area devoted to managed forests. Thusthese policies have positive effects on the external benefits associated withunmanaged (old-growth) forests and negative effects on the external benefitsassociated with managed (plantation) forests. Because the effect on the com-bined area of managed and unmanaged forests is ambiguous, no statement canbe made about the effect on external benefits that are associated with both typesof forests. However, FAO (1992) estimated that 82 percent of the tropical forestarea logged between 1981 and 1990 was in previously unlogged (unmanaged)forests. This figure would suggest the relative importance of the positive effectof lower log prices on unmanaged forest conservation compared with the nega-tive effect of reduced managed forests.

2. If protection is declining over time or the domestic processing industry gains some efficiency overtime, the price depressing effect of an LEB would decline over time. The effect is thus well represented bythe model, with an increase in k with pk < 0 and (p^l pk) < r.

2 4 8 THE WORLD BANK ECONOMIC REVIEW, VOL. 12, NO. 1

The positive effect of LEBs on unmanaged forests should not be misinterpretedas an endorsement or a recommendation for LEBs. First, the effects of real-lifeLEBs include political economy effects that are not captured by the simple modelpresented here. Second, due to reduced logging and processing efficiency andincreased logging wastes, LEBs and other trade restrictions are clearly inferior tofirst-best policies (for example, a charge for the conversion of forestland equalto the external benefits of unmanaged forests). Even in the context of the simplemodel presented in this article, LEBs can be justified as second-best policy instru-ments only if first-best instruments are impossible to implement and if the ben-efits of reduced logging outweigh the efficiency costs imposed on the economyas a result of the price distortions from trade restrictions. In policy terms, re-moving LEBs in the absence of efficient first-best policies for protecting forestswill increase the pressure on unmanaged forests.

Other Policies

Policymakers sometimes claim that agricultural intensification programs aswell as forest plantation projects reduce the pressures to convert unmanagedforests. Within the conceptual framework presented here, agricultural improve-ments, such as increased yields from improved seed varieties or improved farm-ing practices, would reduce pressures on forests only if they reduce the potentialprofitability of agriculture on currently forested lands. This would occur only ifthe demand for the agricultural product is very inelastic (for example, in the caseof subsistence agriculture). Agricultural improvements would then reduce theprices of agricultural outputs and, thus, the profitability of agriculture. In thiscase, the same quantity of agricultural output would be produced on a smallerarea of land, and pressures for deforestation would be reduced (for the subsis-tence case, see Angelsen 1996).

By contrast, if demand for the agricultural product is elastic (for example, inthe case of an export crop), agricultural improvements would increase the po-tential profitability of agriculture on currently forested lands. The area of agri-culture would expand at the expense of managed and unmanaged forests, andagricultural progress would unambiguously increase deforestation. If agricul-tural intensification does not change the potential profitability of agriculture oncurrently forested lands (for example, because irrigation systems are installed incurrently cultivated areas only), there would be no effect on forestry.

Several other policies increase producer prices and, thus, lead to increasedproductivity of land use in either agriculture or managed forestry. In the case ofexport goods, devaluation of the national currency increases the profitability ofagriculture, managed forestry, and logging of unmanaged forests. Devaluationtherefore contributes to increased conversion of unmanaged forests. Road buildingincreases the producer prices paid to farmers and foresters, particularly in moreremote and, therefore, often unmanaged forest areas. Road building is particu-larly harmful to the conservation of unmanaged forests, increasing the profit-ability not only of alternative cultivation but also of logging itself (see also Chomitz

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and Gray 1996). Although higher producer prices reduce logging waste, theyalso go along with more logging of unmanaged forests.

Measures that reduce decisionmakers' discount rates include improved accessto credit and more secure tenure. Lower discount rates unambiguously increasethe area of managed forests because they reduce the cost of waiting for trees tomature. The effect on unmanaged forests at the agricultural margin depends onthe profitability of logging. If logging is profitable by itself (logs are typicallysold in the market), a lower discount rate slows the logging of unmanaged for-ests because it reduces the opportunity cost of leaving the timber standing in theforest. If logging is not profitable by itself (logs typically are not sold but areburnt), land clearing is an investment that has costs (labor, equipment) and ismade for obtaining the benefits of alternative land use. A lower discount ratestimulates this investment and advances the logging of unmanaged forests. Thelatter situation is reported for parts of the Brazilian Amazon (see Schneider 1993).Empirical evidence that the availability of credit advances deforestation is alsoprovided by Ozorio de AJameida and Campari (1995), Barbier and Burgess(1996), Pfaff (1997), and Andersen (1997). At the frontier between unmanagedand managed forests, a lower discount rate can also lead to increased conversionif the higher returns to plantation forestry outweigh the reduction in opportu-nity costs of the standing unmanaged forests. Kishor and Constantino (1993)makes this point in a static context.

IV. EXTENSIONS AND FURTHER RESEARCH

This article suggests a new conceptual approach to the analysis of economicdeterminants of forestland use. However, the model has limitations that reduceits direct applicability to policymaking situations.

One limitation of the model is the assumption of an exogenous log price pathand, hence, the assumption that log output does not influence log prices, vonAmsberg (1994) contains a simulation model with the same structure underly-ing the model, but with an endogenous log price path. The simulation modeldetermines the profit-maximizing land use and profit-maximizing forestry effortfor a finite number of land classes (representing lands with differing transporta-tion costs) for a finite number of time periods assuming that all land is coveredwith unmanaged forests in the first period. The analysis compares the supply oflogs that results from these land-use choices with the demand for logs for thesame price at different levels of demand elasticity. The model is rerun until a logprice path is found at which the log market clears in all periods.

This simulation model allows analysis of dynamic land use in a situation inwhich log prices respond to supply. Such a situation would be expected, forexample, for a local fuelwood market or for a large log-exporting country. Thesimulations also illustrate the theoretical results of the basic model and could beused together with location-specific data to estimate deforestation effects em-pirically in specific real-life policy situations. In all simulations, the resulting


equilibrium price path for logs shows the characteristic of declining rates ofincrease, consistent with the assumptions of the basic model with exogenous logprices. The simulations produce seven major results that are consistent with thetheoretical results derived here.

First, a tax on log sales (simulated by having the market clear for consumerprices that are equal to producer prices plus tax) leads to a reduction in theproducer price compared to the base case. Consistent with the results of theanalysis with the basic model, the reduced producer price path leads to a reduc-tion in logging of unmanaged forests and a decrease in the area with managedforests. The area with unmanaged forests increases, while the area with man-aged forests decreases. Agriculture contracts at the margin with unmanaged for-ests and expands at the margin with managed forests. Figure 2 shows the resultsof this simulation and the comparison with the base case.

Second, a charge levied per area of unmanaged forests logged (like a Pigouviantax for the reduction of external benefits from the standing natural forest) leadsto a reduction in logging of unmanaged forests. This reduction in logging leadsto a reduction in managed forests at the extensive margin. Log prices are some-what higher than in the base case, and the margin between agriculture and man-aged forests shifts in favor of managed forests.

Third, a reduction in transportation costs (for example, as the result of roadimprovements) leads to increased pressure on the frontier and an expansion ofagriculture and managed forest at the expense of unmanaged forests. The effectof road building on the log price path and logging intensity is ambiguous be-cause the reduction in transportation unit costs and the increase in distance dueto increased logging operate in opposite directions.

Fourth, an increase in agricultural productivity for a product with infinitelyelastic demand (for example, exports of a cash crop from a small country) leadto an increase in agricultural area. The resulting increase in the log price pathshifts the area of managed forests into the area of unmanaged forests, whichdecline. At the other extreme, an increase in agricultural productivity for a prod-uct with inelastic demand (for example, a pure subsistence crop) leads to a de-cline in the agricultural area, a fall in log prices, and a reduction in the logging ofunmanaged forests.

Fifth, if demand for logs is highly elastic (the case of small timber-exportingcountries), an increase in the productivity of managed forestry creates additionalpressures to convert unmanaged forests. However, if demand for logs is inelastic(for example, where timber supplies fuelwood for the local market), increasedsupply of logs from plantations reduces the price of logs and, thus, reduces thepressure to convert unmanaged forests. As in the case of agriculture, demand forlogs in a real-life situation is neither fully elastic nor fully inelastic. The resultingnet effect from the introduction of plantations is ambiguous and depends oncase-specific demand elasticities. In certain cases, the increase in productivity ofmanaged forests increases the logging of unmanaged forests in the short runbecause of the additional demand for managed forestland. In the long run,

von Amsberg 151

however, as production from managed forests enters the market, logging ofunmanaged forests is reduced. In the theoretical case of total absence of man-aged forestry, logs are a nonrenewable resource with increasing extraction costs.In this case, the price path shows an increasing rate of price increase.

Sixth, an increase in the decisionmaker's discount rate (for example, as aresult of a reduced time horizon or more uncertain tenure) leads to an expansionof agriculture into managed forest areas because log prices are lower and thereturns to forestry are better than the returns to agriculture due to the longergrowth period for trees. However, logging of unmanaged forests increases onlyslightly if timber rents at the margin of unmanaged forests are relatively low oreven negative. In these cases, clearing land is an investment that is less profitablewith a higher discount rate. Increasing security of tenure alone does not drasti-cally reduce deforestation.

Seventh, open access to the unmanaged forests drastically advances logging.In the long run, however, the remaining unmanaged forest area is the same withopen access and secure property rights because in both cases all lands with posi-tive conversion profits are ultimately logged. Under open access, the log price isinitially lower (because of excessive supply from still abundant forests), laterhigher (because excessive logging leads to higher transportation costs), and fi-nally equal to the case of secure property rights.

Important additional research in three areas would strengthen the analysis.First, many of the parameter values that are used in the simulations could beestimated empirically for specific locations, as is done for a related model for thecase of Belize by Chomitz and Gray (1996). This would allow quantitative pre-dictions to be derived for specific policy interventions. Second, a model of aforest as a stock of homogenous timber is clearly unrealistic. In particular,unmanaged forests consist of a variety of tree species with highly different eco-nomic values. Even though some of the qualitative effects of this heterogeneityof timber are captured in the production function for logs employed in this ar-ticle, a modeling approach closer to the physical realities of a natural forestwould be desirable but would require additional empirical work. Finally, impor-tant economies of scale in land use, both internal (for example, lumpy invest-ments necessary for forestry and agriculture) and external (for example, mini-mum area for biodiversity conservation), are not addressed in the current model.

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